Characteristics of the best Canadian bank to invest in: dividends, growth, and investment quality

On the whole, investors have underestimated Canada’s top bank stocks for as long as I’ve been in the investment business. As a result, the best Canadian bank to invest in is often traded at attractive share prices. Because they were growing, and cheaper in many respects than other stocks, they gave conservative Canadian investors a near-ideal combination of pluses: above-average dividend yields and long-term records of paying dividends; low-to-moderate ratios of per share price-to-earnings; and above-average long-term capital gains potential.

That’s why I’ve continually recommended buying Canada’s top five bank stocks since the 1970s. It’s also why that advice has paid off so nicely.

A tip on the best Canadian bank to invest in: Don’t limit yourself to Finance stocks

Simply put, a well-constructed stock portfolio will make your life easier and maximize your gains.

When you try to pick a handful of stocks that will all beat the market, you are asking a lot of yourself. No one, not even people that devote their entire lives to it, has ever been able to consistently pick stock-market winners over long periods.

On the other hand, it’s relatively easy to acquire a balanced, diversified portfolio of mainly high-quality, dividend-paying stocks, spread out across most if not all of the five main economic sectors—Resources & Commodities, Finance, Manufacturing & Industry, Utilities and Consumer.

If you diversify, you improve your chances of making money over long periods, no matter what happens in the market.

By spreading your holdings out across most if not all the five sectors, you can avoid overloading yourself with stocks that are about to slump because of industry conditions or a change in investor fashion. By diversifying across the sectors, you increase your chances of stumbling upon a market superstar—a stock that does two to three or more times better than the market average.

The best Canadian bank to invest in pays some of the best dividends

Here are 3 tips for using dividends as a barometer for picking Canadian bank stocks:

1. Bank stock dividends can grow. Stock prices rise and fall, so capital losses often follow capital gains, at least temporarily. Interest on a bond or GIC holds steady, at best. But banks like to ratchet their dividends upward—hold them steady in a bad year, raise them in a good one. That also gives you a hedge against inflation.

For a true measure of stability, focus on banks that have maintained or raised their dividends during economic and stock market downturns. These banks leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they provide an attractive mix of safety, income and growth. Canadian bank stocks are well known for their financial stability in the face of economic downturns.

2. Bank stock dividends are a sign of investment quality. Some good banks reinvest a major part of their profits instead of paying dividends. But failing banks hardly ever pay dividends. So if you only buy bank stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst banks.

3. Look for Canadian bank stocks with consistent dividends. One of the best ways of picking a quality stock is to look for banks that have been paying dividends for at least 5 to 10 years. Dividends are cash outlays that an unsuccessful bank could never produce. A history of dividend payments is one trait that all the best bank dividend stocks have.

Hold onto the best Canadian bank to invest in

We’ve long recommended that most Canadian investors should own two or more of the Big Five Canadian bank stocks—Bank of Nova Scotia, Bank of Montreal, CIBC, TD Bank and Royal Bank. That’s mainly because of their importance to Canada’s economy.

Banks remain key lower-risk investments for a portfolio. As well, the big five Canadian bank stocks all have long histories of annual dividend increases.

We believe Canadian bank stocks are still well positioned to weather downturns in the Canadian economy, contrary to pessimistic forecasts on the banks’ prospects from some in the business media. They trade at attractive multiples to earnings and continue to raise their dividends.

Have you found the best Canadian bank to invest in? How did you do it? Have you found Canadian bank investments to be fruitful, or have you been skeptical about them? Have you found Canadian bank stocks to be attractive in share price or the dividend paid? Share your thoughts with us in the comments.